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Software AG reports higher earnings for first quarter 2006 driven by sustained growth in product revenue


* Total revenue rises by 13.5% to €113.8 million
* Licensing revenue grows by 23.7% to €33.4 million
* Robust growth in both ETS and crossvision business lines
* Operating income (EBIT) up by 19.9% to €21.5 million

Darmstadt, Germany, 28.04.2006, Software AG (Frankfurt TecDAX: SOW) reported operating income (EBIT) of €21.5 million for the first quarter of 2006, an increase of 19.9% over the year-ago period. The operating margin (EBIT) for the quarter rose to 18.9% from 17.9% in comparison with the first quarter of 2005. Total revenue for the first quarter rose by 13.5% to €113.8 million. Robust growth in both the ETS and crossvision business lines supported the revenue expansion. Software AG’s continuing success in the growth markets of Latin America, Asia and the Middle East accounted for more than one-third of revenue growth in the first quarter.

Detailed results 1Q2006:

Higher licensing revenue drives overall revenue growth
Total revenue for the first quarter was €113.8 million, an increase of 13.5% (9.6% on a constant currency basis) from the €100.3 million recorded in the year-ago period. Continued strong growth in licensing revenue was once again the most dynamic factor in overall revenue expansion. For the first quarter, licensing revenue rose by 23.7% to €33.4 million. Maintenance revenue for the period rose by 8.7% to €47.5 million, while service revenue increased by 10.3% to €32.2 million.

Both of the company’s business lines contributed to revenue growth. Enterprise Transaction Systems (ETS) had total revenue for the quarter of €86.1 million, up 14.5% from the year ago period. Licensing revenue for ETS showed particular strength in the first quarter, with an increase of 33.0% to €26.5 million. The crossvision (previously denominated “XML Business Integration”) business line recorded total revenue of €22.6 million, an increase of 18.1% from the year ago period. Licensing revenue for the crossvision products rose by 28% to €6.4 million for the first quarter.

“The results achieved in the first quarter are an initial confirmation that our growth strategy for 2006 and beyond is proving successful,” said CEO Karl-Heinz Streibich. “The results of our ETS business line reflect our leading position in the market for software to support business processes operating on mainframe computers – a market which continues to have a positive sentiment. In the crossvision Business Line, we expect an acceleration of license revenue in the course of the year as further products become available.”

Geographic expansion supports revenue growth
The company’s geographic expansion contributed to revenue growth in the first quarter. The USA and Canada, the single most important market with 25% of total revenue, saw an 11% increase in revenue for the period to €28.4 million. Key European markets such as Spain (+ 7% to €18.8 million) and the UK (+49% to €10.2 million) also achieved significant growth and compensated for a weakness in Germany, where revenue declined by 9% to €13.5 million. In addition, growth markets such as Latin America, Eastern Europe (including Russia) and the Middle East, which the company has focused on recently, saw revenue increase by 59% to €14.0 million in the first quarter. These growth markets accounted for more than one-third of total revenue growth in the first quarter, increasing their share of group revenue to 12%.

Further improvement in operating margin
Operating income (EBIT) for the first quarter was €21.5 million, an increase of 19.9% from the €18.0 million for the year ago period. The operating margin (EBIT as a percentage of total revenue) for the first quarter rose to 18.9%, an improvement of one percentage point over the 17.9% margin for the first quarter of 2005. The further improvement in operating margin reflects increased revenue, an improved product mix and sustained cost discipline. In addition, the higher margin was achieved at the same time as the company continued to commit considerable resources to its sales and marketing organization and launched important new products (in particular crossvision) in the market.

Net income and earnings per share
Net income for the first quarter rose by 23.1% to €14.4 million in comparison with €11.7 million for the year ago period. Earnings per share for the quarter (fully diluted) were €0.51, up 18.6% over the €0.43 for the year ago period. The weighted average outstanding shares (fully diluted) for the first quarter was 28.1 million, an increase of 0.9 million over the year ago period.

Continued strong balance sheet and cash flow
Total shareholders’ equity at 31 March 2006 was €404.8 million, an increase of 20.2% from the €336.9 million at the end of the first quarter 2005. The equity to assets ratio rose to 65.0% in comparison with 62.2% a year ago. The continued improvement in the balance sheet ratios and in the cash position (€183.2 million at the end of the first quarter in comparison with €134.7 million at the close of the year ago period) reflects the company’s sustained, strong net operating cash flow, which rose to €26.1 million in the first quarter, up 19.7% from the €21.8 million of the year ago period. Free cash flow rose to €24.2 million or 21.3% of revenue, corresponding to €0.86 per share.

The company confirms its initial guidance for the year 2006. Accordingly, the company anticipates total revenue growth of 10% (at constant currency rates). The company expects that this overall revenue growth will be driven primarily by enhanced licensing revenue, projected to increase in a corridor of 18% to 20% for the year. In addition, the company expects higher revenue for professional services, projected to grow in a corridor ranging from 12% to 15% for the year, while maintenance revenue is expected to remain stable. Total revenue for the crossvision Business Line is anticipated to show growth in a corridor of 20% to 30% for the year, while total revenue for the established ETS line of business is expected to show sustained growth in a range from 5% to 7%. In addition Software AG is aiming for a 21% to 23% EBIT margin for 2006. “The Q1 results indicate strong growth and form a solid base for reaching our full year targets” said Karl-Heinz Streibich.
Software AG, headquartered in Darmstadt, Germany, provides a full range of products and services to deliver a service-oriented architecture (SOA) IT infrastructure, based on over thirty-five years experience in high-performance databases, application development tools and integration technologies. Its technology offers process driven integration through legacy modernization and SOA based integration. Software AG helps its customers to achieve a competitive advantage through flexible and adaptive business processes based on fast and easy integration of existing IT assets. It supports the mission-critical systems of over 3,000 customers globally. Software AG is represented in around 70 countries with more than 2,700 employees. It is listed on the Frankfurt Stock Exchange (TecDAX, ISIN DE 0003304002 / SOW). In 2005 Software AG posted €438 million in total revenue.


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